Risk and Uncertainty in Decision Making
Risk is the effect of uncertainty on objectives and can involve opportunities as well as threats. Analytical tools help identify and manage some risks, while complex systems leave important interactions and outcomes uncertain.
THE IDEA
On uncertainty
Risk practitioners understand risk to mean ‘the effect of uncertainty on objectives;’ a deviation from what is expected that gives rise to opportunity, threat, or both. (3) Risk management practices offer risk professionals an ability to untangle opportunity from threat – and to act by amplifying opportunity and dampening threat. In tracing the history of risk, Peter L Bernstein notes that:
“The boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature.” (4)
Risk management builds on an extensive body of good practice aimed at ‘creating and protecting value.’ (3) This body of practice includes processes for identifying sources of risk and assessing the likelihood and consequence of risk events materializing. Controls are established to reduce risk, and risk indicators are identified and tracked to monitor change. Risk maturity assesses the degree to which these processes are embedded in an organization.
The premise is that we have the analytical capabilities to identify and isolate sources of risk and exercise control. While this is undoubtedly true in some contexts, it is less so when we consider the messily-entangled social, technical, ecological, economic, and political worlds we inhabit. Perhaps it is here, in the uncertainty and discomfort this complex world creates, that the journey begins toward an understanding of what a ‘mastery of risk’ might mean.
When to use it
Evaluating strategic business decisions under volatile market conditions.
Designing regulatory frameworks for emerging technologies where risks are poorly understood.
Managing multi-stakeholder projects in conflict-prone environments.
Personal career planning when industry disruptions are unpredictable.
FROM THEORY TO EVERYDAY LIFE
In practice
Investment Portfolio Diversification
A financial manager uses risk assessment to balance high-risk and low-risk assets, aiming to amplify returns while dampening potential losses. This applies the concept of untangling opportunity from threat through careful analysis of likelihood and consequence.
Project Risk Register
A construction project team identifies risks such as supply chain delays or weather events, assesses their impact and probability, and establishes controls (e.g., buffer stocks, contingency plans). They track risk indicators to monitor changes, reflecting standard risk management practices.
A MOMENT TO REFLECT
Put it to work.
When have you faced a situation where analytical risk management fell short due to complex, entangled factors? How did you navigate that uncertainty?
Which uncertainties in your decision can you estimate with useful confidence, and which remain difficult to quantify?
What might it mean to 'master risk' in a messy socio-technical context, beyond just establishing controls and indicators?
References
- Against the Gods: The Remarkable Story of Risk — Peter L. Bernstein (1996)
CONTINUE THE CONVERSATION
Source texts
- Cynefin - Weaving Sense-Making into the Fabric of Our World ED02 (Dave Snowden Sonja Blignaut Zhen Goh)